A Correction for the SP500? Will the Bull Market End? The Talking Chart book reached Top 15

A Correction for the SP500? Will the Bull Market End? The Talking Chart book reached Top 15

WHEAT

A short-term COT pattern emerged in the last Commitments of traders data for Wheat. This pattern is suggesting a move down.  As you can see the seasonal chart (blue line) is also showing a decline can be expected. The volume in the last two bars can be interpreted as a distribution.

Wheat analysis

Usually, I would wait for a lower short-term high and then search for short signals but take a closer look at the last up move (highlighted in orange). Since its beginning (August 12th), there wasn't a single simple price action sell signal! No daily low was violated1 That is strange and makes me think that a complex signal or a lower short-term high won't be necessary to catch a good move here. The last bar is a Long Tail which might start the move down.

S&P500

Expressing an opinion that the S&P500 is ready for a correction is not something you'll see very often here on PieceofTrading.com. It is not that I am a permabull or I don't like shorting stock indices. I just think that most of the time it is better to focus on the long side, because the fundamental trend is almost always up, most of the time the indices are going up and many more. 

But at the current moment, the correction seems highly probable. 

You might think that right now I'll show you some well-tested price action patterns, that will say exactly that. Unfortunately with short signals, it is not that easy, and we have to be very careful. Especially with a roaring bull market.

S&P500 analysis

What is suggesting weakness in the bull market is that:

  1. VIX is rising along with the S&P500, suggesting that some hedging is taking place.
  2. Advance/Decline is diverging from the chart. 
  3. We haven't seen a break below a daily low in the last seven days. Going back we see that this is exactly how long such kind of up moves last. That is a lot of buying with no selling. On some occasions, it can be eight days, but after that, a move down occurred. 
  4. Last, seasonally speaking September is a month when a decline can be expected.

This post is not about the end of the world, or the next depression or that the S&P500 will fall with 60%, nothing like that. I am just pointing out to some facts which mean that the bull market has some problems and a small correction or a sideways movement can be expected. 

How I'll trade this? In the past, I was buying out of the money Vix call options expiring after a few weeks to 1 month or I was directly buying Vix ETF. That is a possible way of attacking the current situation. Of course, if there is good price action short signal I'll take it.

I'll use this week's blog post to share something. I am very happy to announce, that thanks to you the Talking Chart book has reached Top 15 books in Analysis & Trading Investing Strategies category on Amazon. Hopefully, soon it will reach Top 10 and begin the fight for a bestseller. 

The Talking Chart Book

Now, let's find your missing piece!

Vassil Banov,
Founder of Piece of Trading


Trades mentioned here are either taken or will be taken by the author if the right conditions appear. They are NOT recommendations nor any of this constitute investment advice. Please read the Risk Disclaimer
Seasonal indicators courtesy of Larry Williams, ireallytrade.com. Charts made with TradeStation®. tradestation.com

TAGS: S&P500, SPY, SPX, COT, Commitments of Traders, Cycles, Fundamental Analysis, Price Action Trading, The Talking Chart

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